Financial Poise Glossary

Accredited Investor – Individuals who are allowed by law to invest in private equity, venture capital, hedge funds, and private placements. Regulation D, Rule 501 of the Securities Act of 1933 defines accredited investor as: (a) an individual (or married couple) whose (joint) net worth exceeds $1 million, excluding the value of the primary residence; or (b) an individual with income exceeding $200,000 in each of the two most recent years, or a married couple with joint income exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year. For more information, see Accredited Investor Definition.

Alternative investment – Any investment that doesn’t fall under the categories that are considered to be traditional – stocks, bonds and cash. Alternative investments tend to have long investment horizons and to be complex in nature. They are less regulated and are not as liquid as traditional investments.

Angel – A wealthy individual who invests in entrepreneurial companies. Angels invest their own capital rather than that of institutional and other individual investors although angels perform many of the same functions as venture capitalists.

Asset – Any resource that is owned that has economic value. For alternative investing purposes, assets are tangible items owned by an individual or group that have value that can be converted to cash and are controlled or held for a certain period with the expectation that they will provide future benefit or payoff.

Asset allocation – The process through which a group of investors or individual investors determine how their investment portfolios should be divided across different asset classes.

Asset class – An asset class is one of the different types of investment categories, such as private equity, tangible assets, venture capital, that institutional and individual investors consider when making decisions on where to invest.

Beta – measures the correlation between a particular stock and the S&P 500 stock index. Why does it matter? Understanding that correlation also measures volatility. High-beta stocks have greater volatility as the S&P moves up and down, while low-beta stocks have less. Volatility, in this context, is not a bad thing. Nor is it a good thing. It is just an objective fact that you can use to help inform your overall investment decisions.

Click here for a four minute video from Yahoo! Finance and then come back to read the rest of this definition. Keep in mind that beta is not an exact science and is based on past stock performance. As Investopdia explains “a beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.” Now click here to see a two minute video from Investopedia. Finally, to reinforce your understand, see how NASDAQ defines the term, here.

Capital structure – The mixture of equity and debt that a company has raised.

Carry / Carried Interest – A fee paid to maintain the fund an later distribute its profits. The industry standard is referred to as the “2 and 20.” This means that the general partner charges: (a) an annual fee equal to 2% of assets under management plus (b) 20% of the profits of the fund (that is, after the limited partners are paid back their initial investment). The preferred return, when there is one, typically is in the 5-10% range. The 20% sharing of profits is called a “carried interest” and is commonly paid at the end of the life of the fund. If the fund doesn’t become profitable, no carried interest is paid.

Committed capital – Pledges of capital (money) from investors who express their intent to invest in a private equity fund. Committed capital is not given to a fund all-in-one payment, but rather is required to be paid as needed, over a three to five year period (typically), starting in the year the fund is formed.

Diversity/Diversification – Spreading out investment capital across a variety of investment types and asset classes so that risk is lowered. Colloquially, it’s the equivalent of not “putting all your eggs in one basket”.

Due diligence – Due diligence is a process of reviewing an investment opportunity to assess its adequacy for an investor. You, as an accredited investor, need to perform your own due diligence before investing in any investment opportunity. However, when you invest in a fund (whether a PE, VC, or hedge fund), the fund manager will, in turn, conduct its own due diligence before investing the fund’s money (of which your money is a part) in any portfolio company. Due diligence varies depending on what the investment opportunity being assessed is. Generally speaking, due diligence can be broken down into these categories: financial/accounting; operational; IT; valuation; legal; and tax. More on due diligence can be garnered by reviewing this and this.

EBITDA (earnings before interest, taxes, depreciation, and amortization) – A standard used to measure a company’s profitability before any adjustments are made for interest expenses, tax obligations, or non-cash charges associated with acquisitions and capital expenditures. This measure is frequently used to evaluate a business’s ability to handle debt.

Equity Crowdfunding vs. “Crowdfunding” – Crowdfunding, as it is generally used, refers to a large number of people gifting small amounts of money to a cause, company, project or person they believe in. Also known as “Rewards-Based Crowdfunding”, this type is open to anyone, regardless of income and doesn’t give the “investor” any type of ownership, return or equity in their investment. Equity Crowdfunding is only open to accredited investors and although the investment amount is lower than for other types of investments, it is still significantly higher than the average American could afford. In return, the investor receives equity and, if all goes well, a return on their investment. Equity Crowdfunding, although approved by the JOBS Act, has not yet been implemented because of pending SEC regulations.

Exemption – A security that is free from the legal obligation, liability or penalty being applied to other securities. For example, some securities are exempt from the requirement to register with the SEC. The Uniform Securities Act lists the types of securities that are exempt from registration requirements and the obligation to file advertising materials. However, even if a security is not required to be registered with the SEC, no security is exempt from the anti-fraud provisions of the law. Securities that are exempt are: Government Securities, Commercial Paper, Financial Institution Securities, Insurance Company Securities, Not-for-Profit Enterprise Securities, Public Utility and Common Carrier Securities, Securities Listed on Stock Exchanges and Options or Warrants.

Family Office – A private company that manages investments and trusts, as well as many day-to-day activities for a single family, also known as a “Single Family Office”. Additional services include property management, accounting, payroll and legal affairs, philanthropic activity and estate planning. Costs for a family office typically run over $1 million to operate, so the family’s net worth usually exceeds $100 million.

FINRA (Financial Industry Regulatory Authority) – Authorized by Congress, FINRA is the largest independent securities regulator in the U.S., whose primary role is to protect investors by maintaining the fairness of the U.S. capital markets. This is done by writing and enforcing rules governing the activities of more than 4,190 securities firms with approximately 634,950 brokers; examining firms for compliance with those rules; fostering market transparency; and educating investors. Read more here.

General partner (GP) – One of the members within a limited partnership who is responsible for the day-to-day operations of the fund. The general partners assume all liability for the fund’s debts.

Hard Assets – See “Tangible Assets“

Hedge Fund – Current securities laws do not provide a precise definition of the term “hedge fund.” At the most fundamental level, a hedge fund is a private investment pool for wealthy, financially sophisticated investors, historically organized as partnerships, with the general partner (or managing member of an LLC)- the hedge fund manager- managing the fund’s portfolio and making investment decisions. In concept, they are intended to hedge against risk, however, they are known for a “high risk, high reward” approach. Hedge fund managers typically seek a specific range of performance, regardless of market trends. They do this by using sophisticated strategies and techniques. Read more here.

Initial public offering (IPO) – An IPO occurs when a private company decides to sell shares to public investors. Before an IPO, a company’s stock is not traded on a public stock exchange. These offerings are usually underwritten by an investment bank.

Investment advisor – A financial intermediary who provides assistance and advice to investors about their financial assets and management of the same. Advisors will examine investment funds for their clients and monitor the progress of existing investments. In some cases, they pool their investors’ capital in funds of funds.

Investment bank – A financial institution that acts as an intermediary and provides various financial services such as underwriting securities offerings, facilitating mergers and acquisitions, and trading securities for its own account. Investment bankers are a component of investment banks.

Investment horizon – The length of time it will take for an investment to produce a return. In alternative investing, the typical expectation is an average of three to five years. Until an investment produces a return, invested capital will be illiquid – tied up and unavailable to investors.

Issuer – The company, group or entity that issues a security of debt or equity to investors.

JOBS ACT of 2012 (Jumpstart Our Business Startups) – Legislation signed into law in April 2012 that was intended to encourage funding of small businesses by lifting various securities bans and easing regulations. Titles II and III of the legislation are the two most discussed sections among investors, advisors and the crowdfunding and startup communities. Title II, which lifted the ban on general solicitation, passed on September 23, 2013. Title III is still pending. AIMkts covers the JOBS Act frequently from a variety of standpoints and implications. For more information, start here.

Leveraged buyout (LBO) – The acquisition of a company or business unit, typically in a mature industry, with a considerable amount of debt. The buyers who obtain controlling interest repay the debt and typically restructure the company, with the intent to make it healthy and resell it. For an expanded explanation of how leveraged buyouts work, view a definition from Princeton University here and watch this video by Khan Academy.

Limited partner (LP) – An investor in a limited partnership. Limited partners can monitor the partnership’s progress and the advantage for these limited partners is that they are not personally liable for business debts, but in exchange, they cannot become involved in its day-to-day management if they are to retain limited liability.

Limited partnership – An organizational structure that entails a temporary, contractual arrangement between entities referred to as ‘limited’ and ‘general’ partners. The arrangement serves as a temporary business, for tax and legal purposes, and is governed by a partnership agreement. Read an expanded definition here.

Limited partnership agreement (LPA) – The written contract setting forth the terms and conditions that govern the relationship between the limited partners and the general partners in a particular fund. View a sample Limited Partnership Agreement.

Liquidity – Refers to how easily an asset or security can be bought or sold in the market for cash, without affecting the asset’s price. Liquid assets are those that can be easily bought or sold and some advisors consider it to be safer to invest in liquid assets because they can more easily be sold for cash, allowing the investor to get money back from the investment more quickly.

Merger arbitrage – A trader strategy applied when Purchaser company announces that it is buying Target company. Through the period until the closing of the purchase, Target company’s shares should rise to same price that Purchaser company offered. The strategy is to take positions to capture the spread and to reap the profits when the deal closes. The strategy can be frustrated by, for example, regulatory actions that delay or forestall closing, by a down-swing in demand for the Target company’s goods or services, and also by a spike in the costs of Target company’s inputs.

Money-Center Bank – A bank that is usually located in a major economic center like London, Hong Kong, Tokyo and New York. These banks do not borrow from nor lend to consumers, but rather work only with governments, large corporations and regular banks.

Portfolio – Any collection of financial assets that is owned or held by an investor and/or that is managed by financial professionals or groups. Portfolios do not have to any defined type of investments and can be a mixture of public and private investments. Most investment portfolios are created on a case-by-case basis for the specific needs of the investor including time frame, investor objectives and the investor’s ability to tolerate risk over a period of time.

Private Equity – Purchasing control positions in established privately held companies, typically by borrowing a high percentage of the cash used for the purchase, for the purpose of making improvements to such companies and then selling them within about seven years.

Private Equity Fund – Any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course.

Private Placement – A private placement is a private sale of securities to an individual or group of accredited investors. A private placement is mostly used by seed, startup and early stage companies, as it doesn’t require the registration with the Securities and Exchange Commission. Securities sold in a private placement can be in any form, including equity, equity-linked and debt, and can be issued by any type of entity, including funds, private companies, and even public companies (usually in private equity-like transactions called PIPEs, an acronym for a private investment in public equity). To sell securities under a private placement, an issuer needs to prepare a PPM. A PPM is a formal document in which an issuer presents an offer to potential investors. A PPM typically includes a description of the investment opportunity, risk factors associated with investing, a summary of the issuer’s capital structure, a description of who will manage the investment opportunity, the terms of the offering, and various other disclosures.

Rate of return – The profit on an investment over a period of time, expressed as a percentage of the original investment. Profits may come in annually or at the end of an investment period, depending on the terms of the investment. Learn about calculating a rate of return here.

Return/ Return on Investment (ROI) – Simply put, a ‘return’ is profit made on the sale of an investment of interest after all fees and other financial obligations are paid out.

Rule 506(b) – “Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Rule 506(b) is a rule under Regulation D of that provides conditions that an issuer may rely on to meet the requirements of the Section 4(a)(2) exemption,” according to the SEC. Read a more in-depth explanation here.

Rule 506(c) – A newly adopted rule under Regulation D of the Securities Act defining how an issuer will still be able to offer and sell an unlimited amount of securities, but now allowing for the use of general solicitation to do so (subject to the requirement that reasonable steps are taken to verify that all purchasers are accredited investors). Read what AIMkts thinks the implications may be here.

Secondaries / Secondary Market – This term can have two applications, depending on the context. The first is a reference to a Secondary Public Offering, which happens when a company holds an IPO and later decides to offer another set of stock for purchase. The second and more widely used reference, points to the selling of shares on the secondary market, which occurs when shareholders, like employees for example, decide to sell some of their stock to others.

Securities – A “security” is a document that represents an interest or a right in something else. It is a form of ownership that enables you to own an underlying asset without taking possession and, thus, that enables efficient trading (buying and selling). U.S. securities law defines a security as:

any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Securities laws exist to attempt to help ensure that investors have an informed, accurate idea of the type of interest they are purchasing and its value.

Silver Bullet – A metaphor referring to a direct or immediate, effortless solution to a problem that cuts through complexities and is perceived to have extreme effectiveness. In the investment world, it refers to a get-rich-quick ploy to imply that an investment will bring in more money, faster, than other types of investments.

Startup – Any newly formed company that is the early phases of research and development, and will need funding from investors to keep growing and furthering efforts to improve or expand on their idea. The startups that attract investors may be considered to be high risk, because of an innovative idea or technology, for example, but they attract investors because of the potential for high returns on investments.

Tangible Assets – Physically real items of equitable value such as machinery, buildings and land, business inventory, cars and homes. Intangible assets are those with no physical aspect like patents, trademarks and copyrights.

Title II – A measure of the JOBS Act that directs the SEC to promulgate rules eliminating the long-standing prohibitions on “general solicitation” and “general advertising” (which we refer to collectively as “general solicitation”) in certain private securities offerings. Read an easy-to-understand primer on the JOBS Act and its titles and provisions here.

Title III – A provision of the JOBS Act that establishes the crowdfunding exemptions and directs the SEC to promulgate rules to give effect to those exemptions. Read an easy-to-understand primer on the JOBS Act and its titles and provisions here.

Venture Capital – According to the U.S. Small Business Administration, venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.